Making the Most of Your Retirement Investments

The Lange Money Hour: Where Smart Money TalksJames Lange, CPA/AttorneyListen every other Wed. on KQV1410 AM or visit our radio show archives.Note: Some events referenced in our archives have already passed.

Welcome to The Lange Money Hour: Where Smart Money Talks, hosted by Beth Bershok, with expert advice from Jim Lange, Pittsburgh-based CPA, attorney, and retirement and estate planning expert. Jim is also the author of Retire Secure! Pay Taxes Later. To find out more about his book, his practice, Lange Financial Group, and how to secure Jim as a speaker for your next event, visit his website at paytaxeslater.com. Now get ready to talk smart money.

1. Introduction of Guest – Paul Merriman

Beth Bershok: We are talking smart money, and thank you for joining us this evening. I am Beth Bershok. We have a great guest with us today, so much to cover tonight. First of all Jim Lange, who is a CPA , attorney, and bestselling author of Retire Secure! Pay Taxes Later. Our guest, Paul Merriman, is checking in from Seattle. Hi Paul.

Paul Merriman: Hey Beth, it’s great to be with you guys.

Beth Bershok: We are so glad that you joined us, and you have so many things going on. I don’t know where to start. Let’s start with, you’re the founder of Merriman, an investment advisory firm and, as I mentioned, you guys are based in Seattle. You are also the author of several books including Live it Up Without Outliving Your Money, Getting the Most From Your Investments in Retirement. When did that book come out Paul?

Paul Merriman: Well, the original book came out in 2005, but last summer, it was updated for new information and a few new recommendations. So, it’s really about a year old at this point.

Beth Bershok: You are also editor and publisher of www.fundadvice.com, which you call an educational website, and I have to say I’ve been on it and that is the truth. You have videos, a Q & A blog, and online workshops. You also are the host of soundinvesting.com, which is your own weekly online radio show, which Money Magazine rated the Number 1 money podcast for 2008. So, congrats on that one.

Paul Merriman: Thank you.

Beth Bershok: Alright, and you are joining us for the next hour. I do want to mention that Jim and Paul are willing to take questions tonight. So, if you have a question, go ahead and call anytime during the hour at 412-333-9385. And I know Paul that Jim wanted to get started with the Safe Withdrawal Rate.

Jim Lange: Well, before I want to do that, I just want to tell our audience how lucky they are to have Paul’s wisdom. Paul is just one of the classiest guys around. His firm, by the way, and maybe it’s down a little bit since I talked with him last, manages a billion dollars of assets, and he’s such a straight shooter and a trusted member of the financial community. We’re really honored to have you, Paul.

Paul Merriman: That’s very kind, thank you, Jim. It’s absolutely an honor to work with you guys, too. I have been recommending your book, heartily, and look forward to having an extra long conversation with you one of these days on the air.

Jim Lange: Good, the other thing that I’ll say about your book, Paul, and I actually think this is a very high compliment, is not only is it a terrific book, but the book, and you can tell me if I’m wrong, but the book is really you. It’s not like when you wrote the book, it seems to me that you went to the library and did a lot of research and came up with it. This looks and feels like the kind of advice that you’ve been giving to your clients for over the last 30 years and you’ve just taken some of the best of it, and put it in the book and then have also charts and graphs to back up your advice. But I just think its outstanding how you kind of integrate your personality and your wisdom in your book.

Paul Merriman: Well, I appreciate that, and as I think you know, Jim, what we’re trying to do is to bring the best academic research we know to readers in a very simple way. If we accomplish that, we will have succeeded.

2. Safe Withdrawal Rate – How Not To Outlive Your Money

Jim Lange: Alright, great. One of the areas we cover in the book that a lot of authors and financial advisors are afraid to cover, and something that I consider pretty tough stuff, but I actually think it’s critical today, what I will call the Withdrawal Rate or the Sustainable Withdrawal Rate. So, what I mean by that is you have a certain amount of money in your portfolio--to make a nice even number, let’s say $1,000,000. And the question then becomes “How much money can you withdraw as a practical matter, stay safe, and you never want to run out of money?” That’s probably the Number one goal. But at the same time, you don’t want to be so frugal that you can’t really enjoy the money that you have accumulated. I’m going to have a few more specific questions, but why don’t I first throw that out and say, how would you approach a real client situation who comes in to you and says, “ok,”--and I’m not necessarily talking about investment choices, although that’s certainly related-- but how would you approach the question “How much money can I safely spend if I have $1,000,000?”

Paul Merriman: I love this question because the answer is $40,000 or $75,000, it’s up to you.

Jim Lange: Ok, $75,000! Next question!

Paul Merriman: Yes, exactly, but there’s a bit of a price to pay for that. This is not uncommon for somebody to have a set amount of money. A million dollars is easy to think through and their cost of living above and beyond, whatever their pension might pay them. Let’s say it’s $40,000, and so they need that $1,000,000 to be supporting that $40,000-a-year distribution. But let’s call that just their basic cost of living. Let’s say that’s not their “Live It Up” approach. Well, what if they worked for five more years? What if they put away more money over those five years, and the portfolio grew at some reasonable rate of return? It is absolutely possible that instead of $1,000,000, they have $1,500,000. Now you see at $1,000,000, they have the just getting by at $40,000 that had to be adjusted each year for inflation, let’s just assume 3.5%. Well, their cost of living hasn’t changed just because they have a bunch more money. But now, they can legitimately take 5% $1,500,000, or $75,000 instead of the $40,000. So, it really depends upon whether it’s the “Just Getting by Strategy”, or when you have saved more than you really need, which I think is the greatest luxury, financial luxury, in retirement.

Beth Bershok: Jim and Paul, are you taking into account the age of the clients when you determine that rate?

Paul Merriman: Well, you know I was using the example of somebody who comes in who might be 60, and they work for five more years. Now Beth, I think you’ve hit the nail right on the head. I’m 65, and I plan to work at least another 15 years. Let’s say I only make it 10 more. At that point--and I’ve always been a saver since I was 11 years old--I could take out 8% a year, and it would not endanger the ability of that money to last me for the rest of my life. So your point is well taken. How many years you’re likely to live which even includes your health. If you’re a single person, and you’re in poor health, well, maybe you want to enjoy a higher percentage distribution because you’re not expected to live that much longer.

Jim Lange: Let me ask you this, Paul. You went from 4% to 5% to 8% depending upon the age, and I have a couple of sources that I use myself in practice. Is there any particular source that you have, you know, where there is in effect a chart of your life expectancy and then your Safe Withdrawal Rate that you use, or is this something that you have developed over time?

Paul Merriman: Well, it is something that we’ve developed, Jim, but let’s just think this through for a second. If you start at $1,000,000, and you could have gotten by on a 4% distribution, and instead of retiring then with $1,000,000, you worked five more years until you have $1,500,000. Well, there are a couple of things that have happened. Number one, you have a lot more money. Number two, you have fewer years to live, so the money doesn’t have to go so far. Now here’s the last, I think, important decision. I contend that, if you take money out on a variable basis, and what I’m talking about there is not taking out 6% and then the next year 6% plus inflation. No, you don’t need to take out that much money. Remember, your cost of living was only $40,000 to $45,000 a year. And now you’re up to $1,500,000, and you take out $75,000. That’s your “Live Up Retirement”, not your basic retirement. So let’s say the market goes down to $1,300,000. Now you take 6% of $1,300,000. You’ve taken a cut in pay, still more money than you need, but you’ve taken a cut in pay from what you got the prior year because the market went down, and when you self-adjust like that, then what you do is the most important I know and that is, get defensive. You can get defensive on how much you take out, percentage wise, you can get defensive in whether you use a fixed or variable distribution. These are hugely important decisions. If I’m confusing your listeners, I’m going to try to point them to an article they might read. But the point is that you’ve got some decisions that have a huge impact whether you take 4%, 5% or 6%.

Beth Bershok: Hey, Paul, can you hang on? We’re going to ask you for that article in just a minute. We’re going to take a quick break and when we come back, if you can guide us to that article that would be great. The Lange Money Hour: Where Smart Money Talks.

Beth Bershok: Talking Smart Money, I’m Beth Bershok with Jim Lange and our guest tonight, Paul Merriman, checking in from Seattle. Founder of Merriman, an investment advisory firm and the author of Live It Up Without Outliving Your Money. Quickly to the studio line if you have a question, is 412-333-9385. Before the break, we were talking about Safe Withdrawal Rate, what you can actually take out so that you don’t outlive your money. Paul, you were about to give us a link to an article so people can check this out on their own.

Paul Merriman: What they should do, Beth and Jim, is to go to www.fundadvice.com. That’s our homepage, www.fundadvice.com. On the right hand side of the page is a list of must-read retirement articles, and the one that I’m referring to is entitled Retirement – When Your Portfolio Starts Paying You.

Beth Bershok: Is this also one of your videos, because you have a lot of videos online, too? You call them episodes.

Paul Merriman: I don’t think I’ve done one on that, it is part of the DVD that we have done. In fact, there’s a brand new DVD coming out in a few weeks. It’s a 3-hour piece which we have done, and it’s in there. But if they’ll read that article, I think they’ll get a very good sense of what we’re trying to get them to do.

Jim Lange: And I don’t know if that’s the same article as Chapter 13 in your book, but I thought that that chapter was really, if not the best, certainly one of the best discussions I have ever read about Safe Withdrawal Rates.

Paul Merriman: That is basically the same discussion, although in the book, in some ways, when you write a book, you have to focus on the whole book, not just on the pieces. So, sometimes a book is an easier thing to read than an individual article. But I want to make one very important point. It is easy to have formula approaches to distributions, to asset allocation, how much in stocks, how much in bonds – depending on your age. That is never going to be as good an answer, and you know this from your business, Jim, as when somebody sits down and listens to your particular set of risk tolerance, desire to spend, and it isn’t just the desire for one person to spend, it’s normally a couple. And one is a saver and one is a spender and that takes some listening and some questions and some talking – and so there is no simple formula.

Jim Lange: And not only that, there are so many individual situations. For example, one of the things I just ran into, and I’d be interested in your take on it, I had a client--now I’m going to simplify the facts--they had $1,000,000, and they wanted to spend considerably more than $40,000 or even $50,000, and they were just really in a panic because their portfolio had gone down recently, and they wanted to spend more, and they didn’t think they wanted to spend more than the Safe Withdrawal Rate. But they had significant equity. In fact, they had a paid off house, and it was well in excess of $500,000. And what I said was, well, I know you don’t want to sell the property and that’s fine. And I know at this time you don’t want to mortgage the property or get a reverse mortgage on the property. But let’s use at least a portion of that equity in the back of our mind to determine a Safe Withdrawal Rate. I don’t know if you would ever allow that type of calculation, but after we were done, we did end up spending, or allowed the spending, if you will, of more money than just the formulaic amount based on Safe Withdrawal Rate, knowing that at some point in the future they could either sell, mortgage – I don’t particularly like reverse mortgages because of fees because I’m cheap - but, they were able to maintain the lifestyle that they wanted. Because in the back of their mind, they knew that they could tap into this real estate. I don’t know if you would consider that a sound piece of advice.

Paul Merriman: I think that’s absolutely sound, Jim. That is the kind of thing you can’t create a simple formula for it. We always have to deal with what people want and what they need. I have two teenagers, and they want what they want when they want it, and adults are like that too. So, what we always have to do is, we have to figure out some way to legitimately justify and prepare them for the future. You could have just let them take more, but what you’ve done that I think is very good, is that you set it up so that in the future, they know that if they spend this money now, they’re going to have to give up an asset in order to protect their total portfolio for the rest of their life. Let me just suggest one other possibility there, and that is, let’s say somebody did have to cut back to 4% and that felt like it was a sacrifice but they wanted to have some hope for the future. What I have done in a number of cases is, set people up at $1,000,000, 4%, when it gets to $1,250,000 they get to take out 4.5%, when it gets to $1,500,000, they get to take out 5%. You see they’ve got some hope that they’re under a certain set of conditions, they’re going to be able to spend more in the future. I think what you’ve done is very smart, and I’m sure that couple is very happy they met you.

Jim Lange: Thank you. Let me ask you a tougher question. I often get clients who come in and say, we’re in our mid 60s, our health is both very good and even though we expect to live maybe even 30 years, it makes more sense for us to do our travelling, to have some of our fun money and to spend a little bit more now on the theory that, well, when we’re much older, we might have some physical restrictions, we might not be able to travel as well as we might. Is that something that flies with you, or are you just a little bit too conservative to put up with that kind of talk?

Paul Merriman: No, I think that’s realistic. And again, the beauty of having an advisor is that you set down the plan, and then on a regular basis, you review and find out whether, for example, like if the market did again what it did last year, that is going to require people to adjust. And I think you have to adjust to that. The reality is, that the majority of people, when they retire, actually spend, in their early years after retirement, more than they made before they retired so those of us who are trying to give guidance to folks are going to have to understand there is a reason why this happens. On the other hand, as people get a little older, the cost of living tends to go down, and then of course, later, it goes up again because of medical costs. So there is a likely cycle here that does, in theory, recommend a little more spending early, then a little less, then a little more. You’ve got to be careful that you don’t allow people to get so far in and the market and their portfolio goes against them that they can’t ever recover. And that’s the dangerous point. We’ve got to be careful we don’t allow people to do that, because when the markets are up, people have a tendency to be very hopeful and bullish and “Yes, I can take high risks!”. Then the market goes down and that risk tolerance changes, and all of a sudden they’ve panicked and they’ve reconstructed their portfolio to be very conservative, where very little money can be taken out. And if they’ve spent too much early on, they’ve put themselves behind the 8 ball. So, this is not just a solution for the next year, you’ve got to be working on that solution constantly over the year’s health, wealth and happiness.

Jim Lange: I will mention that you have said two things that fly in the face of conventional wisdom that I happen to agree with on both counts. One, you said that you should be adjusting your spending as time and your portfolio change because the traditional view is that 4% and then next year 4% plus inflation. And you’re saying, “Wait, wait, wait, let’s be a little bit more realistic”, if there’s a change in the market you should change your expectations and change your withdrawal rates, which is not the traditional view. And the other thing that you said that flies in the face of traditional advice that I absolutely agree with is, that you’re going to spend more money, particularly in the early years of retirement, than when you were working.

Beth Bershok: How does that happen? Really, you guys?

Paul Merriman: Well, one is people have put off a lot of things around the house. There’s a lot of money spent on the house after retirement, that’s one. Two, a lot of travel takes place early on in retirement. Golf is more expensive early on in retirement, then all these things tend to settle in after they have had this little radical enjoyment of retirement. But you know something? If I could share a personal story. I am a saver. I wore the same tie for over a decade. On my 65th birthday, I was doing a workshop and we cut my tie in two, and we decided that age has some advantages and experience has some advantages. So, I don’t have to wear a tie anymore except to weddings and funerals. So, I’m very frugal. On the other hand, I am married to a lady who really enjoys spending money. She loves to give it away--I do too by the way--but she loves to spend money on clothes and art and travel, and that is not the way I am. I’ve been the way I am all my life, she’s been the way she is all her life, and now we have to solve this problem. How does she have the right to spend more when the market goes down, and I really get kind of tense? I’m a person who does not like to lose money, so I want to become very frugal when the market comes down. What my wife and I have agreed that when I retire, that when the market goes up, because we’re going to take this variable or flexible strategy and take 6% of whatever it’s worth, if the market goes up, and it goes up 2 out of 3 years historically, she gets to have a raise, she gets to spend more money.

Beth Bershok: Well that’s fun.

Paul Merriman: But she understands my inner self crying when the market goes down, for me and my clients. And so when the market goes down she says, “Look we’ll take 6% of a lower number” which gives me some sense of security. So when I mentioned before it was about health, happiness and all of this. You know what it’s also about, it’s about finding the right strategy that gives the individual a sense of a security – the job is gone, you can’t make up for a mistake you’ve made by overspending or improperly investing, It’s got to be done right.

Beth Bershok: I have one quick question before we take a break and that is, you two have been talking about adjusting your spending once you retire and using different rates. But how often should you revisit that? In your practices, how often do you revisit that with your clients? Do you do it yearly?

Paul Merriman: I think yearly is a good way to plan, but I can tell you it’s the nature of some people that they want to do that quarterly. It’s just their nature, it’s their way of checking in to make sure they are OK. And you can imagine with this recent market decline how much anxiety there is - people are afraid. They don’t have the confidence, they don’t have the trust, and so they are requiring today a lot more time and effort on the part of our advisors than they did in the big bull market.

Beth Bershok: We’re going to take a really quick break here. We have Paul Merriman, Jim Lange – it is The Lange Money Hour: Where Smart Money Talks.

Beth Bershok: Talking more smart money, I’m Beth Bershok with Jim Lange and our special guest today checking in from Seattle, Paul Merriman. Just a minute ago, though, I wanted to tag on something here because you may have heard us talking there for a second about the next workshop which is coming up on Saturday May 16th, and we have just added another one in June. These are going so well, and we are actually reaching capacity. We have been doing these since February. This is Two New Tax Laws That Create Shocking Opportunities for Wealth Preservation. So, the next one is Saturday, May 16th. We are venturing up into Butler, so if you’re up in that area, this is a chance to check out this information. Four Points by Sheraton. Two seminars, 9:30 to 11:30 in the morning, 1 to 3 in the afternoon. If you’d like to RSVP to that one, 1-800-748-1571. I honestly would do it soon because, as I mentioned, we have been reaching capacity in these workshops. The next one is coming up on June 20th, also a Saturday, Crowne Plaza across from South Hills Village. Now, if you would like to RSVP to that one, you can do that now by calling 412-521-2732, that’s the office number so you can call to register for either one of those workshops. It’s just great information and also, when you attend, you get a free copy of Jim’s book Retire Secure, Pay Taxes Later. One more point about the Safe Withdrawal Rate with Paul.

Jim Lange: Right now we are kind of cautioning readers or listeners not to spend too much money, but it can also go the other way. I have some older clients who are extremely frugal, relative to their portfolios, and one of the people who is like that is actually my mother. At 92 years old, she can probably afford to spend a little bit more money than she does. We were planning this trip to New York, I was going to take her to New York and show her some of the different sites and some concerts and entertainment venues etc. She started talking about getting this scarf at Saks Fifth Avenue. She was really centered on getting this scarf at Saks Fifth Avenue. The last day we were in New York, we were running all over the place, we were running late, and I didn’t even know if we were going to Saks. Finally, we made it to Saks within about 10 minutes to them closing up. Finally, we got in the door, we got to the scarf department, and she saw a lovely scarf and I said “Great, let’s just buy it”. Then she said “How much?” to the sales person, and then I’m shaking my head to the sales person saying “Don’t answer her, don’t answer her!” Anyway he said “Two-hundred dollars” and she said “Absolutely not! There is no way I would ever pay two hundred dollars for a scarf!” And I said, “Mom, it’s a beautiful silk scarf. You’ve been talking about getting a scarf at Saks Fifth Avenue. Here we are in New York, we’re not going to have another chance. I wanted to buy you the scarf. I’m going to buy you this scarf, just enjoy it and take it. And she said, “Absolutely not! Never, never, you can’t get that scarf!”

Beth Bershok: So she doesn’t have the scarf, I’m guessing?

Jim Lange: Well, actually, she doesn’t, but we started to walk away and I said, “Just excuse me for one second, I have to do something,” and she said, “Don’t you go back there and buy that scarf!”, which is exactly what I was going to do! So, it sometimes works the other way, and I sometimes have the issue or it’s a good problem of telling people OK, you have a lot of resources that you could be spending more money. You know some people are very interested in getting the absolute top dollar to their children and grand-children. But some people say, well that would be nice, but that’s not my major concern, and then they’re still spending far less than their Safe Withdrawal Rate. So, I will say that I also have clients, and I’m going to say a good chunk of them, maybe even close to 50%, that have those kinds of issues. Then they hear the media and they don’t apply it to their own situation, and they’re actually, I think, living more frugally than they would have to.

Paul Merriman: Well, it’s what a lot of our practice is about, and I can tell from my experience, in many cases, it’s a matter of establishing a relationship with the clients so that they trust that when you say it’s OK, it’s really OK. Remember, we make less money in managing their money if we encourage them to spend it. So, it’s to our disadvantage, but I sat with a couple that had been clients for many years, and I said to them one night--I was at their home--I said, “Isn’t there any dream, an unfulfilled dream that you have not been able to do for some reason, I don’t know, and it can’t be about money?” And they thought and they thought, and finally the wife said, “I’ve never been to Europe, I’ve never been to Paris.” And I said “Oh my God, you have enough money in petty cash to go to Paris”. And I turned to Sam and I said, “Sam, what about you? Is there not something that you have wanted that you didn’t buy just because it felt too expensive?” And he was very quiet, and finally he said, “I’ve always wanted a motorcycle.” And I went “Oh, my gosh, you know here you are in your 60s, and you’ve never had a motorcycle!” Well, I can tell you that those people, she said that every time she goes in now to get another airline ticket to go on a trip, that she remembers the night that she changed her mind about being able to enjoy her money.

Beth Bershok: So she went to Paris, yeah great.

Paul Merriman: She did, and they have three motorcycles now.

Paul Merriman: And the only difference is, it took them to trust that there was going to be enough. And one of the reasons that we bury people with numbers, I know I get a lot of criticism from people on our staff, that we’re too much about numbers. But I want people to see what it looks like on paper and pretend that’s you. Pretend you’re living through that process. How would you feel? And if we could ever get past that point, get them to trust it and to feel it and be ok with it, I think they will start spending. Including your mother! I want to talk to her!

Beth Bershok: I don’t know about that! Jim hasn’t been able to convince her all this time, I’m not so sure! 412-333-9385 is the studio line. I want to take a quick break. We’re with Paul Merriman and Jim Lange. When we come back, can we touch on common mistakes that investors make? Because there are so many in different categories, and I’d love to touch on that. It is The Lange Money Hour: Where Smart Money Talks.

Beth Bershok: Thank you so much for joining us this evening. I’m Beth Bershok with Jim Lange and our guest, Paul Merriman, Founder of Merriman, an investment advisory firm based in Seattle, author of Live It Up Without Outliving Your Money. Studio line if you would like to check in is 412-333-9385. Common mistakes investors make, and I’m sure both of you see them all of the time. First question is for both of you, what do you think is the number one mistake?

3. Common Mistakes That Investors Make

Paul Merriman: Jim, you want to go first?

Jim Lange: Well, I would say that people’s emotions take over their logic or what logic would dictate. And so, for example, right now a lot of people are in a tizzy, and they are sometimes inappropriately converting to cash, and they do not have faith in the long-term ability of the markets to recover. Sometimes with a 30-year retirement, going to cash isn’t conservative, it’s just almost silly. Likewise, in the good times, I’ve seen people go into the dot-com companies and do things that logic would also say is not a very good idea. So, I would say the biggest mistake is letting your emotions take over your logic, and I actually read something by Nick Murray which was pretty interesting. He said one of the benefits of having an advisor, in addition to presumably the advisor knowing a couple of things that you do, is that the advisor is presumably objective and doesn’t let emotions take over and provides objective advice.

Paul Merriman: Unfortunately, many of those advisors do let emotions take over themselves and the advice that they give, which drives me nuts, because that’s their real value, is being able to stay the course. And may I recommend to your listeners that there’s a book, I just love this book, its called Your Money and Your Brain by Jason Zweig, and I hope you get him on as a guest one of these days Jim and Beth, because I just think his view, his way of helping you understand the expense, the costliness of letting your emotions take over. I have struggled with this question, this question about the biggest mistake. Just today we filmed a YouTube piece, it wont be up for probably a week, and the headline will be something like “The Most Important Investment Decision That We Make” and it has to do with the biggest mistake that we make and that is who we trust. Most people trust the wrong source of information. There is absolutely no evidence that we should trust Wall Street. Now, that may be rather harsh, that may be unkind to people we love. Maybe we have a child who is a stockbroker, but I don’t care – there is no evidence. When I look at ethics and I look at confidence, both at the broker-end and the Wall Street Firm end and all of those things, I do not conclude that I can trust them. I also can’t trust the person that many of you trust. That’s a friend at work, that’s a relative, that’s somebody who you think has your best interest at heart, and I understand that, and you take their advice on how to invest. Main Street is just as bad, if not worse than Wall Street. So what are we left with? Well, we’re also left with Jim Kramer, we’re left with the media, we’re left with Money Magazine. We have Knight Kiplinger on our radio show today. We recorded him, and he will be on this weekend, but Knight Kiplinger is running a publication whose job it is really to sell advertising. Now, they give great advice, I don’t mean that. But I would not trust a publication to guide me through my financial life, which leaves me with one place to go that I see. That is the academic community. That if there is any place we can trust that they have been working in our best interest, trying to get us into mutual funds with low expenses, trying to get us into index mutual funds, trying to get us into mutual funds that have high tax efficiency, mutual funds that have low turnover. The right asset classes, so when I think this through, I think the biggest mistake we make, it’s not even in my book! It is in there, in a way, I guess, on Page Six about trusting institutions. But I think we have to find the right people to trust that truly have our best interest at heart.

Beth Bershok: Now those mistakes that you two just mentioned really apply to all investors, any age. But I know, Paul, that you think there are some unique mistakes for certain categories. Can we start with the retired investor? What do you think the biggest mistake is that they usually make?

4. Biggest Mistakes That Retired Investors Make

Paul Merriman: Well, I think there are a number of big mistakes. Many of them have no plan. They had a plan to get to retirement, financial plan, but they have no plan in retirement. And Jim, as you know, many of them do not take money out in a tax-efficient way. Many of them take too little risk, many of them take too much risk. All of these things are important mistakes that retirees make, and I think a lot of it is, the mistakes are made because, again, they know they can’t re-earn this money so they tend to seize up and take too little risk which is going to cost them because the money is not likely to last. Now, what would you say in the retirement area, Jim, that is the biggest mistake?

Jim Lange: Well, I would say two things. First, I think they sometimes underestimate the number of years that they’re going to need the money. So they say “Well I’m 60 years old, you know I might need the money for 20 years”. Well, what happens if that 60 year old is now 79? Does that mean he thinks he has one year to live? So I think sometimes underestimating the number of years. The second thing that I would say, and this is particularly true of, let’s call it, wealthier more frugal clients, is assuming that all the money is for them and investing all their money. Even let’s say people who are older, so sometimes people you know, take that formula well, I’m 70 years old therefore I should have 70% of my money in fixed income. What I would sometimes tell them is, and let’s even say that this is particularly true for people who have way more money than they’re ever going to spend, that might be appropriate if you have a.) less money and b.) no family, but you have a lot of money and you have a family. So maybe what might be appropriate is to invest, perhaps, half the money as if you were 70 years old and it was solely for you, and maybe a portion of the money, depending on circumstances, not like a 70 year old would invest it, but like a 45 year old who was the age of your children would invest it, because that way you’re really kind of getting a more family oriented approach. Now obviously, I’m never going to put an older client at risk by having too aggressive allocation, but I think so many of them have such conservative allocations, and the other thing that I would say is that sometimes they don’t take into consideration their other sources of income available to them. So, for example, if you are a teacher on a pension or even a teacher, anybody with a pension, that pension, in a way, can be looked at as a bond, it has a guaranteed income, its going to come in yearly year after year, and if you have money to invest, rather than just going to buy, let’s say, some type of formula in terms of stocks and bonds, you should consider your pension or even your social security the equivalent of a bond. So, sometimes people invest too conservatively, not taking into consideration either the next generation or some of the own resources that they have in the way of pensions or social security.

Paul Merriman: Well, I think your point is spot on. It’s interesting because both of our books, in a sense, are aimed at trying to get not only the best you can for your life, but, as I think you may know, my last chapter is entitled “My 500 Year Plan”. By the way, your book is all about making it last. I think that is a wonderful thing about your book, but I will mention one other mistake I see made very often by successful business people or successful investors. They forget that there is a big difference between how you invest to be successful up to retirement and the changes that need to be made in retirement. It is very important that we start including the defense, its not just about offensive anymore, it’s also about defense.

5. Common Mistakes Among 401(k) Investors

Beth Bershok: How about common mistakes because so many people have 401 (k)’s? Common mistakes that 401 investors make?

Jim Lange: I might want to throw in a quick word here, because I would say that one of the biggest mistakes is sometimes irrevocable. Something that you cannot take back is when they retire, and sometimes the less than perfect or perhaps inappropriate investment advisor approaches them, they don’t take into consideration two things. One, is net unrealized appreciation which is a special category of investments if somebody has any company stock in the company that they have been working on, which is granted favorable tax status, but a lot of investors never know about it and they just lose that favored status. The other thing is, they don’t know about, or don’t do anything with the after-tax portion of money in their retirement plan, and that is a big one. Particularly today, there is a method for a lot of taxpayers to get this after-tax dollars and retirement plan, which is, by the way, conceptually, the same as a non-deductable IRA. So, all you non-deductable IRA owners, you should be listening to this point too. There will be a way, and not for everybody, and I don’t have time to go through the mechanics and to go through the whole thing, which, by the way, I do cover in those workshops, because I think that’s a very valuable tool.

Beth Bershok: And we will give you details on those workshops coming up in just a couple of minutes.

Jim Lange: Where you can actually take the after-tax dollars of a retirement plan or a non-deductable IRA and convert that to a Roth IRA without paying the taxes, and we found over a 40-year period, a few as little as $50,000 in those vehicles that you or your family member could be $500,000 better off and the cost to you is nothing.

Paul Merriman: Wow.

Beth Bershok: Yeah, wow, there you go. That’s right, that’s all you can say is wow.

Paul Merriman: Now, I want a request here. I saw one of your presentations many years ago on video. I sure hope that you’re going to let those of us who are out here in the hinterlands see what you’re doing and get a video camera there and take a picture!

Beth Bershok: We’ve done it, we’ve done it! We actually have video posted on the website www.retiresecure.com. But we can get you the whole thing, Paul, if you want it.

Paul Merriman: That would be wonderful.

Jim Lange: But I think what Paul really wants which is, what we have in process, is we’ve actually brought in a professional crew when we do this two-hour presentation on Roth IRAss and Roth IRA conversions. And we are going to be making that available to the general public, as well as to financial advisors. So financial advisors can put on their own workshops using much of this information as the core of their presentations.

Beth Bershok: It is great info, and it is on the way. We need to take one more quick break, The Lange Money Hour: Where Smart Money Talks.

Beth Bershok: I’m Beth Bershok with Jim Lange and our guest from Seattle, Paul Merriman, and we were just discussing right before the break, Jim mentioned one of our up-coming seminars. We have two, and I want to give those to you quickly, because they are filling to capacity so you should RSVP as soon as you can. Two New Tax Laws Create Shocking Opportunities for Wealth Preservation. The next ones are coming up on Saturday May 16th, Four Points by Sheraton, Pittsburgh North, 9:30 to 11:30 in the morning, 1 to 3 in the afternoon. So you can pick one, it’s the exact same workshop both times. Call 1-800-748-1571 and we’re going to be back at Crowne Plaza right across from South Hills Village on Saturday June 20th, same times, for that RSVP, call 412-521-2732. By the way, you can also check this out on our website www.retiresecure.com, 412-521-2732. Alright we are talking with Paul Merriman, and I just wanted to real quickly to see Paul if you had any other comments on, we were talking about common mistakes investors make.

Paul Merriman: We talked about retirees. Let me make a comment about pre-retirees, because there are many more of those than there were a year ago, right now because of this market. Very often I find pre-retirees who have enough money that they could retire now, but they’re working maybe because of health insurance, maybe because they like what they do, maybe because of a pension, but they’re taking too much risk. If they are at a point where they could lower the risk to that of a retiree and still be OK, I would want them to consider that, because there may not be any particular gain for exposing yourself to more pain. So, be careful that you don’t take more risk than you should, longer than you should, or have to.

Jim Lange: And I will throw out a distinction between a pre-retiree and a retiree and common mistakes. Let’s say that you are pre-retiree, maybe you are at the height of your earning power, and sometimes you get confused about IRAs and Roth IRAs, and you become very interested in Roth IRAs and Roth IRA conversions when at that point in your career, when you’re likely to be in the highest tax bracket that you’ve ever been in, you should be more interested in traditional 401 (k)s, where for the retiree, that’s sometimes the best time to get involved in Roth IRAss and Roth IRA conversions. In fact, the seminars are going to be to some extent centered around the possibilities about making Roth IRAs and Roth IRA conversions with the two very special years in 2009 where people over 70 will have no minimum required distributions, which means a lower income tax base, which means a wonderful opportunity to make a Roth IRA conversion in 2010 where there is no income limitation on taxpayers, so anyone, regardless of income, will have the opportunity to make a Roth IRA conversion.

Beth Bershok: OK, believe it or not, we have two minutes left. I have one quick question for Paul. I’m sure you get this question constantly, but, what are your expectations for the market the next year, the next five years, the next 10 years, what do you think?

6. Based on History, Market Outlook Is Profitable

Paul Merriman: Well, let me tell you that over the next 10 years I think the market’s going to be very profitable. Let me tell you why. Number one, if you look at the history of the market going back into the 1800s and you look at the 10-year rolling periods. We just went through the worst 10-year rolling period in the history of the last, almost 200 years, and historically, when you have gone through these very sizeable declines, out the other side of that, whether you invested a year before the bottom, at the bottom, or a year after the bottom, the returns average from 10% to 13% in the stock market. And by the way, that’s in the kind of S&P 500 and we know that historically small cap in value do much better than that. If we look at the 40-year studies, the one-year studies, everything would tell you the next five to 10 years should be very, very good. People don’t believe that because they are afraid. They think that there is a lot of risk out there. You’re right, there is a lot of risk out there, that’s when the biggest returns, the biggest premiums for investing come when risk is high. You want low risk, it’s called a CD. You want to get a higher rate of return in part of your portfolio. History has it, that the stock market for the next five to 10 years should be very, very profitable.

Beth Bershok: Ok I’m happy to hear that. Hey, Paul, thank you so much for joining us; you have been full of wonderful information. I want to guide people to your fundadvice website because I was on it, and there’s just such great information and resources there, it’s www.fundadvice.com. Our website is www.retiresecure.com, and when we are back on May 6th we’re going to be talking about Jim’s estate plan – Lange’s Cascading Beneficiary Plan. Thank you again, Paul, we appreciate it. The Lange Money Hour: Where Smart Money Talks.

COMING SUMMER 2015!
Retire Secure! A Guide to Getting the Most out of What You've Got

Join our mailing list to be notified as to when Retire Secure! A Guide to Getting the Most Out of What You’ve Got will be released, receive updates, news and get FREE bonuses!

James Lange, CPA

Jim is a nationally-recognized tax, retirement and estate planning CPA with a thriving registered investment advisory practice in Pittsburgh, Pennsylvania. He is the President and Founder of The Roth IRA Institute™ and the bestselling author of Retire Secure! Pay Taxes Later (first and second editions) andThe Roth Revolution: Pay Taxes Once and Never Again. He offers well-researched, time-tested recommendations focusing on the unique needs of individuals with appreciable assets in their IRAs and 401(k) plans. His plans include tax-savvy advice, and intricate beneficiary designations for IRAs and other retirement plans. Jim's advice and recommendations have received national attention from syndicated columnist Jane Bryant Quinn, his recommendations frequently appear in The Wall Street Journal, and his articles have been published in Financial Planning, Kiplinger's Retirement Reports and The Tax Adviser (AICPA). Both of Jim’s books have been acclaimed by over 60 industry experts including Charles Schwab, Roger Ibbotson, Natalie Choate, Ed Slott, and Bob Keebler.